The European Union’s insurance coverage authority has proposed a blanket rule that may mandate insurance coverage companies to keep up capital equal to the worth of their crypto holdings as a part of a measure to mitigate dangers for policyholders.
The brand new proposal — made by the European Insurance coverage and Occupational Pensions Authority in a Technical Recommendation report back to the European Fee on March 27 — would set a far stricter normal than different asset courses, resembling shares and actual property, which don’t even should be half-backed.
“EIOPA considers a 100% haircut in the usual system prudent and applicable for these property in view of their inherent dangers and excessive volatility,” it mentioned in a separate assertion.
Such a measure would fill a regulatory hole between the Capital Necessities Regulation and Markets in Crypto-Property Regulation (MiCA), EIOPA mentioned, noting that the European Union’s regulatory framework for insurers at present lacks particular provisions on crypto property.
Circle argued in January {that a} blanket 100% stress issue on crypto property didn’t account for lower-risk stablecoins. Supply: Circle
EIOPA outlined 4 choices for the European Fee to contemplate — one: make no modifications; two: mandate an 80% “stress degree” to crypto property; and three: mandate a 100% stress degree to crypto asset.
The stress degree percentages decide how a lot capital companies want to carry to remain solvent.
The fourth possibility known as on the European Fee to contemplate the dangers of tokenized property extra broadly.
EIOPA mentioned possibility three could be essentially the most applicable possibility.
“An 80% stress to the worth of crypto-asset exposures doesn’t seem sufficiently prudent,” whereas “a 100% stress is extra applicable and aligns with one of many approaches to the transitional therapy of crypto-assets beneath CRR,” EIOPA mentioned.
The 100% stress refers back to the assumption that the crypto asset costs might fall by 100% and that diversification — spreading the danger throughout totally different property — wouldn’t not scale back this stress. EIOPA identified that Bitcoin (BTC) and Ether (ETH) have fallen 82% and 91%, respectively, prior to now.
A 100% capital cost for crypto property would replicate a far stricter strategy in comparison with shares, which vary between 39% and 49%, and actual property, which incurs a 25% capital cost, in accordance to solvency capital necessities specified by the Fee Delegated Regulation 2015/35.
EIOPA mentioned a 100% capital cost for crypto asset-related (re)insurance coverage undertakings shouldn’t be “overly burdensome” and that there could be no materials prices for policyholders.
“The capital necessities would totally seize the danger of crypto-asset with a constructive influence on policyholder safety in case there are materials exposures sooner or later.”
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EIOPA acknowledged that the share of crypto-asset (re)insurance coverage undertakings accounts for simply 655 million euros or 0.0068% of all undertakings in Europe — even referring to it as “immaterial.”
“On the identical time crypto property are excessive danger investments which can lead to complete lack of worth,” EIOPA mentioned, explaining why it recommends possibility three.
Luxembourg and Sweden might be hit hardest by the proposed rule
Insurers in Luxembourg and Sweden are more likely to be essentially the most affected, in keeping with a This fall 2023 report cited by EIOPA, which discovered that these two nations accounted for 69% and 21% of all crypto asset-related exposures amongst (re)insurance coverage undertakings.
Eire, Denmark and Liechtenstein additionally accounted for 3.4%, 1.4% and 1.2% of the undertakings.
Most of those undertakings are structured inside funds, resembling exchange-traded funds, and held on behalf of unit-linked policyholders, EIOPA famous.
Cut up of crypto-asset publicity proxy per European nation in This fall 2023. Supply: EIOPA
EIOPA, nevertheless, acknowledged {that a} broader adoption of crypto property sooner or later might require a extra “differentiated strategy.”
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